This is a special contribution article by Prof. Grant Henning based on his published research on the BLM technical theory. The model, his trailing stop-loss approach, and comments are expressly based on his own proprietary methodology and forecasts in the references below.
Winning Bounce/Lag Momentum Stocks for Week 18 of 2019 (4/29-5/3)
The Bounce/Lag Momentum algorithm continues to be an effective stock-picking guide. It is essentially a numerical derivative of the ratio of the percentage bounce from the 52-week low to the percentage lag from the 52-week high. As such, it is a sensitive positive momentum measure that works well to identify stocks that are in the upper half of their momentum trajectory. Because they are often well into their momentum cycle, it is necessary to watch them closely for sudden reversals. Stop-loss orders may be useful for this purpose. On average, however, these stocks continue to show upward momentum.
Bear in mind that there is much more to successful trading than merely picking good stocks. I suspect that finding good stocks is only about 40% of possible success in equities trading. The remaining 60% is determined by money management and capital preservation. Decisions about entry and exit points and how long to hold a position are especially important. In today’s volatile marketplace, “buy-and-hold” strategies are unlikely to be successful. Therefore, although I am offering weekly stock picks, this should not be interpreted as a recommendation necessarily to buy all of these stocks or to hold the stocks for an entire week.
In these updates, I explore opportunities in three areas: individual small-cap stocks, leveraged Dow 30 stocks, and leveraged exchange-traded funds. This is analogous to fishing for the largest fish in three adjacent ponds simultaneously. This past week, leveraged Dow 30 stocks afforded the best returns of these three approaches, with the lowest portfolio turnover.
Performance of Last Week’s Picks
Last week’s five stock picks gained an overall average of 3.73% on the week. However, as the table below illustrates, this positive performance was possible only by using 2% trailing stop-loss orders. Otherwise, the overall averages showed a loss of 1.92% for the week. This underscores the need for a well-defined exit strategy in order to maximize success. During the same week, the S&P 500 Index gained 1.20%.
|Stock Pick - Week 17||Weekly Gain (Loss)||Weekly Gain (Loss) with 2% Stop-Loss*|
|Coca-Cola Consolidated Inc. (COKE)||9.76%||11.25%|
|Cinedigm Corp. (CIDM)||(2.50%)||(2.00%)|
|SharpSpring, Inc. (SHSP)||2.15%||2.82%|
|ACM Research, Inc. (ACMR)||(11.48%)||3.43%|
|Great Lakes Dredge & Dock Corporation (GLDD)||(2.07%)||(0.83%)|
*A word is needed about the use of stop-loss orders. Formal stop-loss orders provide a temptation to market makers to “take out the stops” when there is little trading volume. For this reason, it is often better to set a mental sell price and execute it when the market reaches that point. Several of you have accurately noted that some of the picks that trigger a stop-loss sell return to favor within a few days. Therefore, it can be more profitable at times to avoid stop-loss sales altogether. In my personal trading style, I tend to err on the side of caution by preferring to suffer a small loss and to repurchase the same stock later than to suffer a large loss if the stock falls and does not return. Note that this just a matter of personal trading style, and it does not work well at all times for all persons.
Another reason for possibly using stop-loss orders for these picks is that they all have already had big momentum moves and are somewhat “long in the tooth”. The BLM method identifies stocks with positive momentum only after they approach their 52-week highs. Thus, they are often vulnerable to sudden downturns, and then capital preservation becomes a more serious issue than with picks made using other trading strategies. The Dow 30 stocks, as reported below, tend to be less volatile than the picks reported above. Thus, there is less need to use trailing stop-loss orders with them, and consequently, they involve less portfolio turnover.
Comparative BLM/S&P 500 Performance through 17 Weeks of 2019
Bounce/Lag Momentum +62.84% YTD
As you can see in the above chart, where the vertical y-ordinate represents percentage gain and the horizontal x-axis depicts number of weeks, the Bounce/Lag Momentum stock picks have more than tripled the performance of the S&P 500 Index. BLM 17-week composite gains of 62.84% compare favorably with S&P 500 composite gains of 18.02%, and have exceeded my strategic objective of 10% per month. While past performance is no guarantee of future gains, I remain optimistic going forward.
For those with the temerity to trade these stocks on margin, I estimate year-to-date gains of 145% when fully margined, to the extent that these stocks were marginable. However, note that unlike Dow 30 stocks, I do not advocate trading these particular stocks on margin.
Next Week’s Market Conditions
Last week was somewhat challenging for momentum stocks, but for next week, conditions appear to have improved. Last week, no stocks were found by the BLM algorithm to exceed the critical BLM score of 30. For this coming week, eight stocks were found to exceed that critical value, the top five of which are reported below. One additional way to gauge market conditions is to examine the ratio of the relative strength index (RSI) to the money flow index (MFI) for a major index of interest. Values above 1 suggest a positive outlook; whereas, values below 1 imply negativity. As you can see in the following chart for the S&P 500 Index, the RSI Index now stands at 72.28, but the MFI Index is at a lower value of 63.45. The ratio 72.28/63.45 is 1.139, which is above 1.00. Therefore, I look for some upward market movement in the coming week.
However, a cautionary note should be sounded by the fact that this week marks the transition from one month to the next, with options expiration and the intention of the FOMC to roll over more of its debt holdings early next month, which represents a reduction in money flow and indicates increased monetary tightening.
A Look at Next Week’s BLM Picks
For next week, because of improving conditions for momentum stocks, the BLM algorithm has identified eight new stocks from among over 5,000 stocks surveyed with a qualifying BLM score above 30. Note that a BLM score above 30 is normally required to qualify as a weekly pick. Although eight stocks were found to qualify as BLM picks, I am reporting only the highest-scoring stocks in the table below, along with each stock’s BLM score and relative ranking.
|Stock Pick - Week 18||B/LM Score||Combined Ranking|
|3PEA International, Inc. (OTC:TPNL)||146.80||1|
|Axsome Therapeutics, Inc. (AXSM)||67.43||2|
|The Trade Desk, Inc. (TTD)||59.69||3|
|Coda Octopus Group, Inc. (CODA)||51.90||4|
|Fluent, Inc. (FLNT)||44.09||5|
Charts of each of these picks are available below. You can see from the following charts that all of these stocks are experiencing upward momentum surges and are reaching new annual price highs. However, it is precisely for these same reasons that extreme caution is warranted in each case.
TPNL (Symbol changing to PAYS)
3PEA International, Inc. provides prepaid card programs and processing services under the PaySign brand to corporations, government agencies, universities, and other organizations. The company offers various services, including transaction processing, cardholder enrollment, value loading, cardholder account management, reporting, and customer service through PaySign, a proprietary card processing platform. It also develops prepaid card products for healthcare reimbursement payments, pharmaceutical assistance, donor compensation, corporate and incentive rewards, and expense reimbursement cards; and payroll or general purpose reloadable cards, as well as gift or incentive cards. In addition, the company offers Buy and Bill programs for patients to purchase directly from physician's office or through an infusion center for physician-administered therapies; payment solution for source plasma collection centers; and PaySign Premier, a demand deposit account debit card, as well as customer service center and PaySign Communications Suite services. Its principal target markets for processing services comprise prepaid card issuers, retail and private-label issuers, small third-party processors, and small and mid-size financial institutions in the United States and internationally. The company was formerly known as PayPad Inc. and changed its name to 3PEA International, Inc. in October 2006. 3PEA International, Inc. was incorporated in 1995 and is based in Henderson, Nevada.
Axsome Therapeutics, Inc. is a clinical-stage biopharmaceutical company. The company is engaged in developing therapies for the management of central nervous system disorders, including pain. It operates in the business of developing novel therapies for management of the CNS disorders segment. Its product candidate, AXS-02 (disodium zoledronate tetrahydrate), is an oral, targeted, non-opioid therapeutic for chronic pain. The company is developing AXS 02 for the treatment of pain in over three conditions, such as complex regional pain syndrome; knee osteoarthritis associated with bone marrow lesions; and chronic low back pain associated with type I or mixed type I and type II Modic changes. Its product candidate, AXS 05, is a fixed-dose combination of dextromethorphan and bupropion. It is developing AXS 05 for the treatment of over two conditions, such as treatment-resistant depression and agitation in patients with Alzheimer's disease.
The Trade Desk, Inc. is a technology company. The company provides a self-service platform that enables clients to purchase and manage digital advertising campaigns across various advertising formats, including display, video and social, and on a range of devices, including computers, mobile devices, and connected television. Its platform enables a media planner or buyer at an advertising agency to purchase digital media programmatically on various media exchanges and sell-side platforms; acquire and use third-party data to optimize and measure digital advertising campaigns; deploy their or their clients' own first-party data in order to optimize campaign efficacy; link digital campaigns to offline sales results or other business objectives; access other services, such as its data management platform and publisher management platform marketplace, and use its user interface and application programming interfaces (APIs) to build their own technology on top of the company's platform.
Coda Octopus Group, Inc. designs and manufactures real time three-dimensional (3D) sonar solutions and other products for sale to the subsea, defense, mining and marine sciences markets, among others. In addition, the company supplies, through its marine engineering businesses, services to prime defense contractors. It operates through two segments: Marine Technology Business (Products segment) and Marine Engineering Business (Services segment). The Products segment sells marine products in range of market segments, including commercial marine geophysical survey; oil and gas; energy and renewables; underwater security, law enforcement and naval operations; underwater construction; environmental applications, and salvage and decommissioning. The Services segment includes Coda Octopus Colmek, Inc. and Coda Octopus Martech Limited. The Services segment provides engineering services to a range of clients in the defense markets.
Fluent, Inc., formerly Cogint, Inc., is a data-driven performance marketing company. It operates through two segments: Information Services and Performance Marketing. The Information Services segment provides solutions to organizations within the risk management and consumer marketing industries. The Performance Marketing segment provides solutions to help brands, advertisers, and marketers find customers in business-to-consumer (B2C) verticals, including internet and telecommunications, financial services, health and wellness, consumer packaged goods, careers and education, and retail and entertainment. The company’s solutions include data acquisition solutions, which includes Connect and ReConnect. Audience solutions which include Performance Now and Audience Now. Mobile user acquisition solutions include Mobile Now.
Dow 30 Picks
Many readers are especially interested in large-cap, low-risk Dow 30 stocks that experience low volatility and may also pay dividends. These stocks also tend to be fully marginable, which means that it is possible to leverage gains by a factor of approximately 3.3. Dow 30 stocks also offer opportunities for options traders. However, because they do not usually produce my targeted 10% monthly growth, I tend to leverage gains by purchasing them only on margin.
Last week’s four Dow 30 picks showed overall average positive performance on the week. Procter & Gamble (PG) lost 0.18%, Microsoft (MSFT) gained 5.28%, Cisco Systems (CSCO) lost 0.92%, and Disney (DIS) gained 5.64%. The combined average was 2.46% on the week, which translates into 8.12% fully margined. Once again, the leveraged Dow 30 picks strategy surpassed the BLM strategy and the leveraged ETF strategy this past week.
My four Dow 30 picks for next week along with their pre-leveraged year-to-date percentage gains are Disney 27.61%, United Technologies (UTX) 33.00%, Visa (V) 23.70%, and Microsoft 28.43%. The rationale for their selection is that these four stocks were found to rank highest of the Dow 30 stocks in a six-index, combined-ranks analysis. The indexes included momentum, value, and growth factors.
These stocks tend to satisfy my personal monthly growth targets only when fully margined.
Next Week’s Leveraged ETF Picks
For this coming week, four ultra ETFs have year-to-date percentage gains approaching or exceeding 100%. These are the VelocityShares 3x Long Crude ETN (UWT) 129.44%, the Direxion Daily Robotics, Artificial Intelligence & Automation Index Bull 3X Shares ETF (UBOT) 93.18%, the Direxion Daily Homebuilders & Supplies Bull 3X Shares ETF (NAIL) 89.34%, and the ProShares UltraPro 3x Crude Oil ETF (OILU) 126.80%. These four funds comprise the ETF picks for this coming week. ETF picks are decided by a combination of growth ranking and BLM score ranking. Note that Energy sector stocks took a hit this past week.
Although such ultra ETFs are already fully leveraged, it is possible to augment their gains (or losses) by an additional 10% by purchasing them on margin. It is apparent that the leveraged ETF strategy was not as profitable as the leveraged Dow 30 strategy for the past week.
Although the BLM algorithm is a proprietary analytical procedure that is the end result of years of statistical analysis, much of its conceptual design is described in my books listed below. However, it currently involves the maintaining of a 100-column spreadsheet with daily updates, including inputs from an AI expert system and a regression residual analysis. Use is made of rank statistics in the belief that a trader should not only find good stocks but should also have a means of comparative ranking of those stocks. Computations proceed throughout each trading day, but these results are posted weekly through this medium.
If you have any further questions about the Bounce/Lag Momentum stock selection procedure, you can probably find the answers in my books referenced below.
Best wishes in your trading decisions,
Professor Grant Henning, Ph.D. (Ret)
My last article is available at the link below, and each set of weekly stock selections are updated on the live tracking spreadsheets and V&M Dashboard available to members under the Tools section.
The Value and Momentum Trader: Dynamic Stock Selection Models to Beat the Market (2010)
Trading Stocks by the Numbers; Financial Engineering for Profit (2015)
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Disclosure: I am/we are long DIS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.